Financial Times: ‘Israel’s Economic Growth Defies Experts’

This article about the surprising growth of Israel’s economy in spite of the enormous hurdles it faces, including war, political shocks and insecurity about the future — all of which are supposed to deal a blow to investor confidence and productivity for obvious reasons — reminds me of a highly interesting interview I read with the controversial but articulate Dan Schueftan, ideological father of the Gaza disengagement and a senior lecturer and director of the National Security Studies Center at the University of Haifa. On the stubbornly persistent strength of the Israeli economy and society Schueftan states:

“Individual Israelis may be extremely unpleasant, but when you look at the Israeli collective, you cannot but be amazed by the strength and resilience of the society as a whole under extreme pressure. Poets should be praising it. Its strength is manifested in the fact that, on the one hand, it does not turn in the direction of capitulation, like the Europeans; and on the other hand, it does not turn in the direction of radicalization, like the Palestinians. The beauty of Israeli society is that the more pressure you put on it, the more it gravitates to the center. It is the eighth wonder of the world. Look, people are not leaving this country. People don’t take their money out of this country. Democracy is flourishing – and if it is threatened, it it is threatened from the direction of anarchy, rather than fascism: In other words, what is threatening the separation of powers in government is not the army, but the Supreme Court. Now, I don’t like it, but if you are at war, and your problem is with the Supreme Court, that’s somewhat comforting.

Imagine, 25 years ago, we were on the brink of tearing society apart on the Sephardi-Ashkenazi issue. Today, we’ve got almost a million kids who don’t know whether they’re Sephardi or Ashkenazi. We all but solve problems of a magnitude and multitude that nobody in the world even encounters. This is a most impressive society, and it’s our No. 1 asset. In our arsenal, if there’s one thing hostile Arabs should fear, it is the strength of Israeli society.

A few weeks ago, in an interview with Al-Jazeera, I was asked if Israel lost its deterrence after the Lebanon War. I facetiously responded, “You don’t understand. If I were a hostile Arab, I’d be frightened of Israel, because this country survives in spite of Amir Peretz’s being defense minister.”

This is a society that basically says, “If the government doesn’t function, we’ll function without government.” And it works!

This is a country that, after six years of war – with buses and pizzerias and cafes exploding, and then a million people living in bomb shelters – has a booming economy.

We may be able to do with less aircraft and fewer tanks. We can even survive confrontations with the Arabs that we don’t exactly win. But if, God forbid, we undermine the strength of Israeli society, we’re doomed.“

Israel’s economic growth defies experts (Financial Times)

By Tobias Buck in Jerusalem

While Israeli and Palestinian negotiators grope their way towards a US-sponsored peace meeting in Annapolis later this year, investors and economists are struggling with a different problem: how to justify the strength of the Israeli economy.

Last year’s botched war in Lebanon, the escalating conflict with Islamist militants in the Gaza Strip, the threat of Iran’s nuclear programme and the weakness of an unpopular and fractious government at home – nothing has so far managed to throw the economy off its high-speed track.

The country’s TA-25 index of leading shares touched record highs last week, and is now up more than a third since the start of the year. Economic growth is forecast to reach 5.2 per cent this year, fuelled by rising consumer spending, buoyant corporate investment and strong exports. Unemployment has fallen steadily, and now stands at just 7.8 per cent – down from almost 11 per cent four years ago.

In a radical break with the past, Israel today runs a surplus both in its current account and budget. This has allowed the government to tackle one of the few remaining blotches in Israel’s economic report card – the high debt accumulated during a two-year recession in 2001 and 2002.

Investment banks such as Morgan Stanley forecast that not even a slowdown in the US will stop the Israeli economy from “growing at a reasonably robust pace”.

The economic strength reflects two broad, long-term trends.

The first came in the form of tax cuts, lower welfare spending, privatisations and capital market reforms implemented when Benjamin Netanyahu took over as finance minister in 2003.

The second change has to do with Israel’s successful integration into the global economy – which has proved an increasingly receptive market for its exports of high-technology products, manufactured goods, pharmaceuticals and services such as consulting.

“We are reaping the benefits of something that has happened over the last few years, and that is how well the Israeli business sector has exploited globalisation,” says Leo Leidermann, chief economist at Bank Hapoalim, Israel’s largest commercial bank.

And while Israel’s over-reliance on software and information technology made the country a prime victim of the technology downturn in 2000, today’s export performance is far more balanced.

The country’s remarkable economic success has given a twist to the debate on the “peace dividend” – the additional boost that the Israeli economy could receive through striking a comprehensive peace agreement with the Palestinians and the country’s Arab neighbours.

While previous peace efforts were accompanied by offers to link the Israeli economy with its neighbours, economists today argue that regional integration would be of limited value to the country.

Israel is also no longer dependent on the Palestinian territories as a source of cheap labour. The country’s building sites and orange groves are today filled with workers from Asia and eastern Europe.

For Palestinians, an end to the heavy security measures that stifle economic activity in Gaza and the West Bank is crucial. Living standards there have plummeted as Israel has placed ever heavier restrictions on the free movement of goods and workers within and out of the territories.

Yet analysts agree that a durable peace would lift the Israeli economy. Tourism would benefit from a more benign security environment, as would foreign investment: no big foreign bank has yet set up a retail network in the country.

“If you had a peace treaty signed tomorrow we could reach annualised growth of 6.5-7 per cent owing to higher foreign investment, increased tourism and reallocation of defence spending,” Prof Leiderman says.

Whether failure at Annapolis dents the benign outlook, economists say, will depend on whether a diplomatic setback triggers another violent uprising by the Palestinians.

Serhan Cevik, an analyst with Morgan Stanley, points out in a recent report that global growth has so far offset all political shocks to the Israeli economy.